In a recent 2015 Revenue Recognition Survey, PricewaterhouseCoopers and the Financial Executives Research Foundation found that 48% of responding companies have not yet completed, and 27% have not yet started, an initial impact assessment of the new revenue recognition standard (ASC 606). Only 20% have completed the initial impact assessment and 5% have started to implement systems, processes and controls.
Of the total respondents, 78% stated that their company has not yet attempted to quantify the financial statement impact of the new standard. Those are startling statistics considering the complexity and pervasive impacts of the new standard and the amount of time it may take to effectively implement it.
ASC 606, a principles based standard, contains a five step model to revenue recognition which will necessitate significant decisions and judgment to apply, and requires new voluminous and granular disclosures. Applying the new standard will have pervasive impacts across organizations (accounting, compensation and bonus plans, customer contracts, debt covenants, information systems, internal controls, etc.).
Fifty-three percent of all respondents believe system changes (billing, AR, etc.), including a change to ERP systems, will need to be made to implement the new standard.
Even if a company’s revenue recognition pattern won’t change significantly under the new standard, evaluating and documenting compliance with its provisions will be time consuming. At the very least, the new disclosure requirements will pose significant challenges for all entities.
Public companies, certain not-for-profit entities, and certain employee benefit plans are required to adopt ASC 606 in fiscal years beginning after December 15, 2017 and for interim periods within in the year of adoption. All other entities are required to adopt ASC 606 in fiscal years beginning after December 15, 2018, and for interim periods in the year following the year of adoption. All companies have an option to adopt the standard one year earlier than the deadline.
Sixty-seven percent of the survey respondents expect that implementation of the new standard will require a significant to moderate level of effort. With 75% of respondents not having completed an initial impact assessment, and 62% not having attempted to quantify the potential financial statement impact, this statistic portends that many companies may discover issues when under a compressed implementation timeline.
So, why are companies delaying planning and starting the implementation process?
The Financial Accounting Standards Board already extended the implementation deadline by one year. That extra year is coming to an end in December 2015. It seems that many companies have not used that extra year to get ahead of the game, and the time left until the implementation date has become abbreviated.
The new standard offers two transition methods, “full retrospective” and “modified retrospective.” Under the full retrospective method, an entity records revenue under the new standard in its income statement for all periods income statements are presented. Under the modified retrospective method, an entity records revenue under the new standard in the period of adoption and does not restate comparative income statements to comply with the new standard.
One major challenge to applying the full retrospective method will be the need to quantify revenue and disclosures for the earliest year presented (that’s 2016 for calendar year end public companies and 2017 for private companies.) In other words, companies on the full retrospective method should start keeping a “dual set of books” and to restate prior year revenues on a real time basis. This will require additional accounting policies, processes and controls as of the earliest year.
If companies do not maintain dual books they may incur significant difficulty (or impossibility) in gathering historical data as the adoption date approaches, the data may not be auditable, and the restatement may be more susceptible to errors. In short, for companies interested in applying the full retrospective method, time is getting short to commit to that course of action.
If companies do not start to plan and implement soon, they raise their risk not timely identifying key implementation challenges, may not have enough time to identify and make necessary information system changes and may incur a higher risk of financial statement misstatements. On the bright side, it is not too late to catch up and get prepared.
Eighteen percent of the surveyed companies that have not begun to address the standard cite resource constraints. That is a fixable problem, but as time goes by, well qualified resources may be harder to come by and may be more expensive.
I recommend companies do not wait. At this stage of the game, I suggest key personnel read the standard and provide training to others in the organization who will be impacted. Then put together a cross-functional group to identify key challenges, implementation steps, timelines and resource needs. If they do this, companies will be better positioned to identify ramifications of the new standard, reduce risks and uncertainties, have a smoother transition, and gain piece of mind.
For information as to how Puncel Consulting Associates can assist you, visit https://www.puncelconsulting.com/revenue-recognition/. I can be emailed at lpuncel@puncelconsulting.com.
Related articles:
“Five Reasons You Shouldn’t Put Off Getting Ready for the New Revenue Recognition Standard” https://www.puncelconsulting.com/five-reasons-you-shouldnt-put-off-starting-to-analyze-and-plan-for-the-new-revenue-recognition-standard/
“Revenue Recognition Transition Methods: No Time to Delay” https://www.puncelconsulting.com/revenue-recognition-transition-methods-no-time-to-delay/
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